Former finance minister Yashwant Sinha accepted his bureaucrats' forecasts without question; as a result, the revenue projections in his budgets came close to collections only by accident.

Often they went grievously wrong.

This year, for a change, revenue is buoyant. Revenue authorities know no economics. So they will simply make a linear projection of revenue, and perhaps add a few per cent in a spirit of optimism.

The finance minister would be sorely tempted to accept such a projection, for it would permit him to spend lavishly in a pre-election year. But he would be wrong if he did that.

The way I read the economy is although the kharif harvest was perhaps a quarter below normal and could take 2-3 per cent off gross domestic product growth, industry is booming.

Since the government extracts most of its revenue from industry, its revenues have been buoyant this year.

The question to ask is whether the industrial boom will continue, and if so, for how long.

If the finance minister were lucky, it would last for two years. He would then have plenty of revenue to spend right till the election.

Flourishing industry would contribute gratefully to the Bharatiya Janata Party's coffers. And thereby the finance minister would have fulfilled his duty towards his party.

That is what he would wish; and although the quality of Jaswant Singh's team is miles better than those Yashwant Sinha surrounded himself with, bureaucrats are inclined to tell a minister what he would like to hear.

So even his star team may give him a rosy forecast of the economy.

I, however, see a number of dark clouds on the horizon. Take manufacturing growth to start with. It bottomed out between May and November 2001, when it was consistently below 4 per cent.

Then it rose; but right till the middle of 2002 it remained just over 4 per cent. Then it rose sharply to over 6 per cent. It fell again below 4 per cent in November, but we need not read too much into that.

What is worrying, however, is the composition. Growth is concentrated in food, drinks and tobacco, textiles and vehicles. Textiles have seen a revival of exports.

Vehicles reflect the rise in sales following the emergence of competition in cars, and some revival in the long-stagnant truck and bus market.

The growth in food, drinks and tobacco, on the other hand, seems incidental and ephemeral.

In sum, manufacturing growth is not broad-based enough to give an assurance of durability; in particular, the so-called growth in capital goods production is really in cars, motor cycles and buses, and not in machinery and equipment.

More direct evidence on investment is available from projects in hand. The volume of new projects being taken up continues to be low; whilst the volume of projects being shelved or abandoned continued to mount throughout 2002.

The downtrend is primarily due to two factors.

First, power reforms are now seen to have failed, Enron has set a dispiriting example, and power projects have been abandoned one by one. Second, there was considerable investment in the past three years in telecom infrastructure; the new private licensees in basic as well as mobile services were spending heavily.

The central, local and state governments were also spending on roads and overbridges. That expenditure seems to have peaked.

The value of manufacturing projects in hand has changed little; but they constitute less than a quarter of the total projects in hand. Thus the portfolio of projects in hand continues to fall, and expenditure on them has slowed down.

One of the factors behind the slowdown in investment is the state of long-term financial institutions. The Industrial Finance Corporation of India is bankrupt and is being kept alive with government handouts.

IDBI's balance sheet is quite bad; it too is shying away from illiquid investments, and looking for a bank as a partner.

ICICI has already merged with its bank. As a result, new commitments on projects have been falling for two years; now they are approaching disbursals. Banks, it is true, are flush with funds, but they too are reluctant to fund investment.

They are investing heavily in government securities; as far as loans are concerned, they have shown a growing preference for consumer credit and housing loans.

Interest rates have been falling; but investment is constrained, not so much by the cost of finance but by its availability.

While total projects outstanding were falling, projects involving foreign technology and investment -- mostly manufacturing projects -- were still rising through 2001. But then they started leveling out; now they are no longer rising.

Worse, the share of those involving foreign investment has been falling. For industrialists frustrated by the constraints of local capital supply, investment from abroad was a welcome way around.

Telecom companies in particular made liberal use of capital from partners abroad. But that avenue also seems to be closing.

Thus whether we look at it from the side of output or finance or intentions, investment refuses to look up. The other stimulant in the present industrial upturn has been exports.

Here, the growth of airfreight began to fall after September 11 and eventually turned negative. It still has not turned up.

The volume of seaborne exports began to rise early in 2002 and was growing at close to 15 per cent by the third quarter.

The growth turned down in October. It is still high, and it is too early to predict the end of the export boom. But it is beginning to lose momentum.

More important, import growth has gone up, trade deficit is widening, and the stimulus to the domestic economy is declining.

Services imports and exports generally balance. The trade deficit is offset by remittances, which have been rising. They have kept up the improvement in the balance of payments and are behind the continuing rise in reserves.

But here too, the improvement in the current account that was visible after the middle of 2001 is no longer that pronounced.

Thus although it is too early to say the industrial boom is over, none of its drivers is showing much life. So the current indications are that it cannot last much longer; in which case the acceleration in revenue growth must also be reversed.

If so, the finance minister would be well advised to take a conservative view of revenue in the coming Budget.

Making overoptimistic projections is not only bad for the finance minister's image, but it leads later in the year to pressure on tax officials to collect revenue by fair means or foul.

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